What I'm about to say, is my opinion only – you can make your own decision by reading this prospectus.
Indeed, I may not be completely around all the facts of this curious investment case, so please conduct your own research if you feel it warrants more of your precious time and effort.
And before I begin digging into this potentially concerning investment case, I must admit that my research comes as a response to an article which appeared on this very website, written by Mr Boyd Peters, Thursday morning.
Without further ado, let's all put our hands together for JC International Group Limited (ASX: JCI), or JCI Group for short.
Who is JCI Group?
Supposedly, JCI Group is a Chinese labour and construction company which works with State Owned Enterprises (SOEs) in China and abroad. It says the market for Chinese-led construction initiatives in international markets will grow rapidly because of something called "One Belt One Road" (OBOR) or the "Silk Road Economic Belt Policy". Basically, this is a Chinese geopolitical initiative put in place by the current government in late 2013 to re-install international trade routes.
The company says OBOR holds massive potential for its global workforce, which it can deploy to remote locations to work on big projects. In fact, the infrastructure initiative set forth by China's SOEs is, "approximately 500 times JCI Group's current revenues," the company said. Essentially, together with its own training facility, JCI Group believes it can be the 'one-stop-shop' for all your low-cost, portable, construction labour needs.
So far, so good.
But who is JCI Group really?
JCI Group operates as a holding company for a collection of either Hong Kong or China-domiciled companies (hence JCI "group"). JCI Group was founded in 2003 by a man named Mr Yonghong Tang (John), who is its Managing Director and consequently the major shareholder. Starting life as a carpenter at a cement factory, "through hard work, tenacity and creativity, Mr Tang's team has completed various influential projects."
This is how the group's corporate structure is reported:
As you can see, JCI Group owns a Hong Kong company, which owns a Chinese company, which owns 75% of another company which happens to 'sponsor' a trade school, of sorts. Somewhere in the midst of all this, Ms Wang Jingxing (Mr Tang's wife), owns 25%. Why? According to JCI Group's prospectus, Chinese regulatory requirements dictate a company, "must be held by a PRC citizen or entity." Seems fair enough.
To get over this little hurdle, Ms Wang has "irrevocably" assigned all economic and legal rights to Ma'anshan City Jiancheng International Economic & Technical Cooperation Co., Ltd.
JCI Group was formed just prior (September 2015) to the drafting of its ASX prospectus (October 2015). Its major shareholder is MCJ China. MCJ China was previously owner of what is now JCI Group's businesses. It holds 49,999,999 shares in JCI Group).
The IPO
Here's where the curious case of JCI Group thickens. The company is currently planning to list its shares on the ASX. According to the ASX website, the offer for JC International Group Limited (ASX: JCI) is expected to close 15 February 2016. At a minimum, JCI Group intends to raise $5 million from Australian investors.
At most, it will raise $12,000,000.
200,000 options will go to chairman John Dixon free of charge. He's an independent director, along with Bronwyn Barnes.
However, even at full subscription, Mr Tang (John) will own 53.08% of the ASX-listed JCI Group. His other director, Youxi Sun, will have 15.17%. And another director, Mr Yangyu Zhu, will hold 3.85%. Combined, that'll give them 72.1% ownership if the offer raises $12,000,000.
The company says it'll use the funds it receives (a minimum of $5 million) to pay IPO related expenses (at least $1.72 million), buy an office in Beijing ($1 million) and use a further $1.4 million for "performance bonds and financial arrangements required to bid for and [w]in new contracts." It also says employee relocation expenses, general working capital and other key operational offices could be a use of the IPO funds.
Peculiars
Interestingly, despite showing significant growth across almost every financial metric in its financial statements, the company said. "After considering ASIC Regulatory Guide 170, the Directors do not believe that they have a reasonable basis to reliably forecast future earnings of the JCI Group and, accordingly, financial forecasts are not included in this Prospectus." It said project timing, future expansion plans and even "significant recent growth" make the company unable to predict growth. That's a little concerning, in my humble opinion.
The Training School, which JCI Group sponsors, apparently employs three permanent staff and 60 part-time teachers, 13 of which are associate professors. Curiously, "The Training School trains students in all major disciplines required for the construction industry, such as bricklayer, steel fixer, concreter, form worker, scaffolding worker, electrician, welder, crane operator and safety officer etc."
It also provides training for, "overseas project background, local country culture and basic language…Approximately 70% of the courses conducted by the Training School are short term (between 3 days to 2 weeks), with on-site accommodation." I think it is a little odd JCI Group use associate professors to conduct this form of teaching.
JCI Group's Chinese subsidiary, Ma'anshan City Jiancheng International Economic & Technical Cooperation Co., Ltd., owes RMB 8,000,000 to a company called, Ma'anshan Zhongji Chengjian Construction Engineering Co., Ltd, from when it took over the 'sponsorship' of the training centre. However, 'Zhongji' also owes the training school an RMB 8,000,000 debt "arising from an interest-free loan". Zhongji is using the loan to, "fund operating activities." The loan was due 31 December 2015.
However, JCI Group appears not to have included this debt on its balance sheet in the prospectus because the RMB 8,000,000 would 'net' to RMB 0. What's more, Zhongji accounted for RMB 271,300,000 of JCI Group's subcontracting agreements and was also a counter-guarantee on one of JCI Group's loans.
Under point 3.6 "workforce management" in the company's prospectus, JCI Group says it pays its mobilised workforce based on their "actual individual performance" and not "strictly according to their actual work hours".
"To maintain a stable workforce in sometimes remote and difficult conditions, JCI Group has implemented a culture which it calls "live together like a family, and work together like the military."
Another interesting thing was the cash balance and interest payments.
As can be seen above, JCI Group reportedly had $1,078,086 in cash and security deposits. However, in the half year, it had only received some $3,995 interest. If we doubled that figure (to be the equivalent of a full year), it would amount to $7,990 in interest. However, that'd be just 0.74% interest! Surely, a company could make more than 0.74% interest on deposits. Especially when we consider they are paying 7.8% on their loans.
What I also found interesting was the statement from the independent accountant who reviewed the company's books. It detailed its procedures for reviewing the books and providing an opinion on them. "These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than that given in an audit," Director Neil Pace of Moore Stephens Perth Corporate Services Pty Ltd said. "We have not performed an audit and, accordingly, we do not express an audit opinion. The audit of the company in the three years prior and including the six-month period ended 30 June 2015 was conducted by Moore Stephens Assurance Adelaide Pty Ltd who are based in Adelaide."
Corporate Governance
Now, every good company knows they've got to have good corporate governance, else the market may get a little concerned. Corporate governance is the thing that makes sure bad stuff doesn't happen to the company and its stakeholders (including customers, shareholders and employees). Unfortunately, JCI Group's corporate governance policies do not conform entirely to the ASX Corporate Governance Principles and Recommendations. Its board of five is made up of three directors who have direct involvement in the business (meaning they're 'executive' directors as opposed to 'independent' directors) and also happen to control meaningful amounts of shares in the company.
JCI Group's board do not have an independent nomination committee, does not have a majority of independent directors, does not have an independent audit committee and does not have an independent remuneration committee.
I should note that the company says its directors' shares will be entered into voluntary escrow if the ASX does not impose it upon them. Escrow would mean that the shares held by directors could not be traded away for a specified amount of time. However, I believe that is beside the point.
As an aside, "pursuant to clause 13.19 of the Constitution, Mr Yonghong Tang will not be subject to the usual requirement of directors to stand for (sic) re-election in accordance with the rotation of directors requirements."
Moreover, Chairman John Dixon's 200,000 loyalty options can vest (meaning he can sell his shares) before their two-year expiry if the major shareholder (Mr Tang) requests him to leave or he is removed from his position by resolution.
Foolish takeaway
You've heard us warn time and again about the potential risks involved in investing in foreign-domiciled companies on the ASX, particularly Chinese companies. For some time, the Singaporean stock exchange has faced a backlash over its vetting of foreign-domiciled companies.
I'm not suggesting JCI Group is a dodgy operator, but I for one will NOT be subscribing for shares in this IPO. And I believe Foolish investors should avoid it altogether, given the risk-reward tradeoff on offer.
